USD/JPY Boosted by Post-Election Market Turnaround

The long tail on the daily chart tells the story of how the dollar plunge that was supposed to happen in the event of a Donald Trump victory, actually did happen. After the election outcome was known early Wednesday, however, the dollar has been in strong rebound mode as expectations of higher inflation and spending under a Trump Administration helped to spur the dollar’s rally. Trump’s unpredictability factor was widely expected to cause the dollar and stocks to overreact to the downside if he won, but the dramatic market reversals that began after the election outcome have been nearly as surprising as Trump’s victory itself.

For USD/JPY, the whipsaw in sentiment has been magnified because the dollar’s moves were intensified by strong yen moves. During Tuesday night’s election, when it became increasingly evident that Trump had a plausible path to victory, the US dollar plunged as expected. Also as expected, substantially heightened perceptions of market risk helped to boost the safe-haven Japanese yen. Together, the dollar drop and yen rise prompted a sharp plummet for USD/JPY all the way down to the 101.00 level before bouncing.

By Wednesday’s trading session, this downside overreaction for USD/JPY was entirely reversed, as the dollar rapidly recovered and renewed risk appetite in the aftermath of Trump’s win pressured the yen. This prompted a surge for USD/JPY above both its 200-day moving average and major resistance around the 105.50 level. Thursday saw extended dollar strength and yen weakness, pushing USD/JPY further up to break out above a key downtrend line extending back to February. In the process, USD/JPY hit a new three-month high just short of 107.00.

Previously, this bullish price action was much more expected in the event of a Clinton win, but it has apparently become the scenario for Trump’s victory as well. In addition, dollar strength has been further bolstered by the lack of post-election volatility and continued expectations that the Federal Reserve will raise interest rates in December. St. Louis Fed President James Bullard said on Thursday that he sees a near-term rate hike coming, although rates will likely remain low for years.

With further dollar strength in the run-up to the next Fed meeting in mid-December, as well as continued Trump-driven market optimism, USD/JPY is likely to continue rising. To the upside, the next major resistance targets are around the 108.00 and then 111.00 levels.

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